Four reasons we’re in for a rough ride

JohnNyaradi

John Nyaradi is Publisher of
Wall Street Sector Selector, a financial media site focused on news,
analysis and information about exchange traded funds and global financial and
economic developments.
John's investment articles have appeared in many online publications including
MarketWatch, Trading Markets, Money Show, Yahoo Finance, Investors Insight,
Fidelity, ETF Daily News, iStock Analyst and his interviews have appeared on
MarketWatch, Yahoo Finance's Breakout, National Business Talk Radio, Sound
Investing, and The Index Investing Show. His book, "Super
Sectors: How to Outsmart the Market Using Sector Rotation and ETFs", is
included among the Years Top Investment Books in the 2011 Stock Trader’s
Almanac.

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Now that the 2012 presidential election is in the history books, investors could face a rough ride as we head into the end of the year and 2013. Factors that might make us airsick include:

1. A European Upset: Greece continues its latest act of "The Greek Tragedy," as its Parliament voted Wednesday for another round of austerity and 30,000 strikers marched in the streets. Spain also continues to deteriorate, with soaring unemployment and a severe economic contraction still underway. In the "core," Germany appears to be getting sucked into the vortex as Mario Draghi warned this week that the German economy is starting to be affected by the ongoing financial crisis. The story in Europe is not over yet.

2. Flying Toward The Fiscal Cliff: Now that the election is over, the nation's attention has been refocused on the "fiscal cliff". After the budget crisis resulted in a downgrade of America's AAA credit rating, the Budget Control Act of 2011 was signed into law. While Congress and the president bickered through the summer of 2011, the S&P 500 dove from 1353 on July 7 to 1119 on Aug. 8, a loss of some 17%. Any chance of the same kind of action as the same cast of characters gathers to face the same fiscal cliff? Read “How to dodge the fiscal cliff.

We currently have the so-called fiscal cliff. If no action is taken, there's going to be a very substantial increase in taxes and cut in spending on January 1 of the coming year. The CBO has suggested that if that's allowed to take place, that it would cause unemployment to begin to rise, and it might throw the economy back into recession...If the fiscal cliff isn't addressed, as I've said, I don't think our tools are strong enough to offset the effects of a major fiscal shock, so we'd have to think about what to do in that contingency.

Furthermore, QE3 has proven thus far to have had virtually no effect on the economy or asset prices as unemployment remains stubbornly high and Q3 earnings were painfully poor. The S&P 500 peaked on Sept. 14 at 1465, one day after the announcement of QE3, and has since fallen about 5%, in spite of this last round of support from Dr. Bernanke and his colleagues at the Federal Reserve. If Ben can't save us, who, or what, can?

4. Crummy calendar: Now that the election is over and the teams are taking the field, what can we expect going into 2013? In the Stock Trader's Almanac 2013 that came out last month, Jeffrey A. Hirsch points out that no matter which party is in office, the post-election year is the worst of the 4-year Presidential cycle. If we go back 179 years over 45 administrations to the beginning of the data set, during the first year of the term, the DJIA (and its predecessors) have had 20 "up" years, 24 "down" years and one with one "no change." The calendar is not on our side.

Strategies for the rough air ahead could include conservative positions like cash or Treasury Bonds, protective put options or long volatility options, while always keeping a watchful eye for the possibility that we'll be able to find smooth air. After enjoying a nice climb in the major indexes so far in 2012, wise investors will now cast an eye to 2013 and give that seat belt an extra tug as a bumpy ride could be straight ahead.

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